The corporate tax cut put some $30 billion into the pockets of America’s largest companies in the first quarter. How’s it being spent?
Not necessarily the way President Donald Trump and Republicans said it would. They sold the cut as a means for companies to spur investment in America and create jobs.
But S&P 500 companies aren’t following through, at least not yet. Relative to cash flow, they are spending about what they always spent on such things as job-producing capital expenditures and shareholder goodies in the form of dividends and stock buybacks.
In short the pie is getting bigger but the slices are all the same proportions as before. That suggests the massive tax cut hasn’t changed corporate behavior so far. Caveat: It’s early.
Even before the tax law passed in December -- reducing corporate levies to 21% from 35% -- companies were expected to substantially increase spending on things like new factories, offices and equipment.
And that’s happening, with such spending by companies in the S&P 500 estimated to rise 18% this year to $641 billion.
That stat looks impressive and has garnered a lot of headlines. But that increase is about the same as in 2014. Moreover, the projected spending just about matches what companies allocated in the past three years as a percentage of their free cash flow -- about 43%. (Cash flow is a key measure of core profits.)
Of course, analyzing capex so soon is fraught. Major investments often take years to plan. Royal Caribbean’s capex is expected to surge more than 500% to $3.6 billion this year because it’s paying for cruise ships it ordered a decade ago.
Share repurchases by S&P 500 companies surged 34% to $178 billion, according to an analysis by Standard & Poor’s. But that spending accounted for 0.76% of the S&P 500’s market cap. That’s in line with the 5-year average of 0.72%.
In the first quarter companies boosted dividends by 8% to $116 billion. In percentage terms, though, it was little changed from the average of the previous four quarters -- about 46% of trailing 12-month free cash flow.
The tax overhaul received oodles of positive press in December and January when companies, like Walmart Inc., announced one-time bonuses and expanded benefits for employees. That may have boosted total compensation, which includes pay and perks. That measure climbed 2.7% in the first quarter, the best performance since 2008.
But wage gains alone remain tepid. In the first quarter, the measure barely moved above the 2.2% average of the recovery, and in April it missed estimates.
Cash on hand at S&P 500 companies is soaring to record levels in 2018, to $1.78 trillion, boosted in part by the tax cut. But on a relative basis, their cash holdings rose 4.6%, slightly below the average quarterly gains last year. That suggests uncertainty over how the tax law will be implemented, especially how overseas profits will be treated.
By Matt Townsend and Brandon Kochkodin
